Defer Your Cryptocurrency Taxes Using a CRUT

Has cryptocurrency become too large a portion of your portfolio for comfort? Have you been delaying diversifying a portion of your holdings due to the large capital gains taxes that would result? If so, a cryptocurrency charitable remainder trust may be for you.

The sale or exchange of cryptocurrency creates capital gains income. If the cryptocurrency has been held for over a year, this is taxed at 15 percent, 18.8 percent or 23.8 percent, dependent upon total income. You can try to to spread sales over many years,in order to “soak up” the maximum amount of income into the 15 percent and 18.8 percent brackets, however it’s really only practical to spread sales over a few years at most.

There is a better solution.

Charitable Remainder Unitrusts

With a charitable remainder unitrust, you contribute some amount of your cryptocurrency to a trust before selling. The trust then sells the cryptocurrency on a completely tax-free basis.

The sale proceeds are then reinvested in more traditional investments such as stocks, bonds, and mutual funds.

From the reinvested proceeds, the trust makes a payment to you each year for your lifetime. (You can alternatively choose to have the payment made for the joint lives of you and your spouse, or a 20 year fixed period.) This annual payment is set when the trust is created, and is expressed as a percentage of the trust’s value at the beginning of each year.

When you (or you and your spouse) pass away, if anything is left in the trust, the balance passes to a charity of your choosing. The charity can by you at any time, so you are never locked in.

The benefits are huge:

The sale of cryptocurrency is exempt from tax.

The only tax paid is on the annual payment. So if you use a charitable remainder trust to sell $10M of cryptocurrency in 2018, but your annual payment for the rest of your life is $200,000 per year, then you only pay tax on $200,000 in 2018. This payment would be taxed at favorable capital gains rates. Depending on the amount of your other income, this strategy may keep you in the 15% and 18.8% capital gains rates, avoiding the 23.8%.

In the first year, you receive an income tax deduction for a charitable contribution. This amount of this deduction is a special calculation done by your attorney-CPA. The deduction can be used to eliminate tax on up to 30% of your income in the first year, and any unused amount carries forward for up to five future years. For example, if a 42-year-old man were to contribute $5M of cryptocurrency to a charitable remainder trust in 2018 and selected an annual payment equal to 5 percent of trust assets, he would receive a charitable deduction of roughly $1M. That deduction could be used against his taxable income in 2018 through 2022.

You are allowed to name yourself as trustee of the trust if you like.

CRUTs are a great method to drastically reduce taxes while doing good. To start the process of getting one set up, contact me.